Rachel Reeves has put the country on notice that sweeping tax rises are coming in her Budget, warning “we will all have to contribute” to building a new future for Britain.
Promising to put the national interest above “political expediency”, the chancellor declined to recommit to Labour’s manifesto commitments not to raise income tax, national insurance or VAT.
Instead, the chancellor said “each of us must do our bit” – her strongest indication yet that she will break her promise to voters and raise income tax across the board when she delivers the Budget on 26 November.
She blamed global problems – such as Donald Trump’s global tariff war – and domestic issues, including the Budget watchdog’s expected downgrade of economic productivity, for the “hard choices” she will make.
After a unprecedented pre-Budget speech from the chancellor:
- The pound fell to a six-month low against the dollar as City traders anticipate tax rises
- Opposition leaders criticised the speech, with Kemi Badenoch branding it a “long waffle bomb”
- Sir Keir Starmer ruled out “going down the path” of austerity
It comes as she scrambles to fill a black hole of up to £50bn in the public finances and keep to her golden rule of funding day-to-day spending with tax receipts.
Speaking in Downing Street, the chancellor said: “As I take my decisions on both tax and spend, I will do what is necessary to protect families from high inflation and interest rates, to protect our public services from a return to austerity and to ensure that the economy that we hand down to future generations is secure with debt under control.
“If we are to build the future of Britain together, we will all have to contribute to that effort.
“Each of us must do our bit for the security of our country and the brightness of its future.”
But a former key adviser to Ms Reeves warned her that hiking income tax might not be enough.
Ex-Treasury minister Jim O’Neill said the markets had interpreted she speech to mean “the manifesto pledge is going to be broken and taxes are going to go up”.
But he warned that if raising income tax was “the only big thing that’s coming, it won’t be long before the markets start to worry again (that) the UK is not getting any growth of substance… and what are they (ministers) going to do next?”
He called for extra measures in the Budget, including “any of, if not all of, serious property tax reform, the end of the triple lock (on pensions), welfare reform, really being even more ambitious about reform of the NHS and using technology to dramatically improve the effectiveness of all government services”.
The Office for Budget Responsibility (OBR) is expected to heavily downgrade its previous forecasts for productivity, adding to the chancellor’s headaches and leaving a black hole of around £20bn in the public finances.
Ms Reeves said that “it is already clear that the productivity performance that we inherited from the last government is weaker than previously thought” which “has consequences for the public finances” in terms of lower tax revenue.
The OBR’s review of productivity is likely to be “the most impactful thing in the Budget, in terms of the change in the fiscal and economic outlook”, she said.
The chancellor also wants to give herself a bigger buffer than the almost £10bn she previously had against her rule of balancing day-to-day spending against tax receipts in 2029-30.
That has led to the expectation she will be forced to increase one of the big revenue-raising taxes, which was previously ruled out in the manifesto.
Ms Reeves repeatedly declined to confirm she will stick to the manifesto commitment, telling reporters: “We’ve got to do the right things. The problem of the last 14 years is that political expediency always came above the national interest, and that is why we are in the mess that we are in today.”
She said she had been appointed chancellor “not to always do what is popular, but to do what is right”.
That would mean a focus on “cutting NHS waiting lists, cutting the national debt and cutting the cost of living”.
If Ms Reeves does rip up the manifesto and increase the basic rate of income tax, she would be the first chancellor to do so for 50 years.
The chancellor’s spokesperson said she does not regret making the manifesto commitment, saying: “Those manifesto commitments were made because we recognised that working people had been asked to pay the price of 14 years of Conservative failure.”
Ahead of the Budget, MPs in Ms Reeves’ own party are increasing concerned about potentially ripping up the manifesto pledges that they made to voters and increasing taxes.
One Labour backbencher told The Independent: "The chancellor's press conference has created a doom loop countdown - with every day between now and the budget being full of speculation - with consumers and businesses putting of spending while they wait and see. What’s obvious is Rachel has decided she never wants to be the PM, and is likely to a one term chancellor only."
Shadow chancellor Sir Mel Stride said the prime minister should sack her if she does hike taxes.
“Rachel Reeves has made an emergency speech because she is panicking about the speculation she has fuelled”, he said.
“But all she’s done is confirm the fears of households and businesses – that tax rises are coming.”
Meanwhile, Reform UK’s deputy leader Richard Tice said: “Rachel Reeves has today confirmed what we all knew – she’s going to hammer working people with even more tax rises. Instead of cutting waste and spending, deregulating and optimising for growth, we are just getting more of the same.”
For the Liberal Democrats, Daisy Cooper said the speech was “pointless”.
Ms Reeves later rejected Tory claims she was responsible for Britain's economic problems. Speaking at Treasury questions in the Commons, she said Labour had found a £22bn black hole when it arrived in government last summer and said the reserve for emergencies had been spent four times over three months into the financial year.
The government’s long-term borrowing costs edged lower after Ms Reeves reiterated an “ironclad” commitment to her fiscal rules and a commitment to bring debt down.
Yields on UK government bonds, also known as gilts, fell as much as six basis points to 4.38 per cent, while the 30-year yield dropped to its lowest level since April at 5.15 per cent at one stage.
Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.
But the yield on 10-year gilts stood just one basis point lower following the chancellor’s unusual pre-Budget address, while on the London market, the FTSE 100 Index dropped nearly 100 points lower.
The value of sterling also fell against the dollar and the euro in the wake of the chancellor’s speech.
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